Part Chart, Part Science: The Evolution of Economic Indicators: Economists Today Have Access to Amounts of Data That Their Forebears Could Only Dream of. as the Economy Changes over Time, the Metrics That Economists Use Change as Well. the Effort to Understand the Large, Complex U.S. Economy Has Led to the Development and Introduction of a Wide Array of Useful Indicators
Somoza, Lela, EconSouth
Imagine a doctor preparing for surgery with nothing but a scalpel and a stethoscope--no high-tech, beeping monitors displaying the patient's heartbeat, blood pressure, and other vital signs. A dramatic scenario, yes, but it's not unlike the situation economic policymakers faced during the Great Depression. The economy was in intensive care, but the government lacked adequate tools to gauge its progress. Armed only with stock price indices, freight car loadings, and incomplete industrial production figures, policymakers struggled to monitor the economy's pulse during the worst economic contraction in modern history.
Today, the situation is dramatically different. Each week brings a stream of data that gives economists, policymakers, and others insight into the economy's performance. Indeed, given the sheer volume of economic data available, it's hard to believe that most of the metrics are a relatively recent invention.
The Depression spurs official measurements "Few people realize that in the 1920s, the government was collecting very little data," explained Mike Bryan, a vice president in the Atlanta Fed's research department. To remedy the gaps exposed by the Great Depression, the U.S. Commerce Department recruited economist Simon Kuznets to create an estimate of the nation's income. Gross national product estimates followed a decade later. Together they formed the national income and product accounts (NIPAs), which for the first time gave policymakers a comprehensive look at the U.S. economy and served as a benchmark from which to judge whether it was growing or shrinking.
Perhaps the most important measure included in the NIPAs is gross domestic product (GDP), a tally of the total value of goods and services produced within U.S. borders. Countless economic decisions hinge on this one figure. But even the so-called granddaddy of economic indicators has in some ways failed to keep pace with the rapidly changing U.S. economy. Concerns about the national accounts date back to their creation. Kuznets was frank about their shortcomings--one being that the accounts did not capture activities that, while not traded in the marketplace, have value nonetheless. More recent concerns center on the NIPAs' inability to capture the economic realities facing individual households, as well as their failure to expose the imbalances that persisted prior to the financial crisis and recession, including those in the housing and financial markets.
The economy and its measures keep changing
Keeping up with structural changes in the U.S. economy has also been a challenge. For instance, services now account for more than two-thirds of GDP, compared to about one-fifth for manufacturing. However, there are vastly more data on the latter. The U.S. Bureau of Economic Analysis (BEA), which publishes the NIPAs each quarter, has worked to change this imbalance--for example, by creating satellite accounts for several industries that are not fully reflected in the national accounts. They include transportation services, tourism and travel, and health care. The estimates parallel the standard accounts but include greater detail and analysis of certain aspects of the economy. For example, the research and development (R&D) satellite account measures the impact of R&D on the economy and estimates how the national accounts would be affected if R&D spending were counted as an investment (it's currently treated as an expense). The BEA plans to incorporate this methodology into its core accounts in 2013, with a potentially significant impact on GDP and other measures. Indeed, if R&D spending had been counted as an investment, GDP in 2007 (not adjusted for inflation) would have increased 2.8 percent, or $396.3 billion.
While structural changes in the economy have affected the compilation and reporting of data, these shifts have also caused some indicators to wax and wane in popularity. …